United States Surgical Corporation

United States Surgical Corporation

150 Glover Avenue
Norwalk, Connecticut 06856
U.S.A.
(203) 845-1000
Fax: (203) 845-4125

Public Company
Incorporated: 1964
Employees: 8,100
Sales: $1.2 billion
Stock Exchanges: New York
SICs: 3841 Surgical & Medical Instruments; 3842 Surgical Appliances & Supplies

The United States Surgical Corporation (USSC) is a leading producer of tools for use in surgery, including staplers, sutures, and laparoscopic instruments. The company was founded in the 1960s by an entrepreneur who had no background in medicine but had an idea about how to use staples in surgery and pioneered the development of this market in the United States. In the late 1980s USSC introduced another innovation in surgical techniques when it began to market tubes and other devices that allowed operations that were far less invasive than conventional procedures. On the strength of this new technique, the company’s fortunes soared in the early 1990s, only to be deflated in the mid-1990s as uncertainty in the health care industry as a whole set in.

USSC was founded in 1964 by Leon Hirsch, the owner of a small, unsuccessful dry-cleaning equipment business. With only a high school education, Hirsch nevertheless had an avid interest in gadgets and in biology, and he often stopped by the office of a patent broker in New York City, where he lived, to see what was around. One day in the spring of 1963 he happened across a wooden device on the man’s desk that looked like a shillelagh. Hirsch was told that the mystery object was used by doctors in Hungary and Russia to make stitches, instead of silk thread, as was used in the United States.

The surgical stapler, as it was known, had first been invented in Hungary in 1908, at a time when many surgery patients died of infection from contamination of their wounds. With the stapler, an area inside the body could be clamped off before any cutting was done, which cut down dramatically on the loss of blood and other fluids. However, the stapler was extremely cumbersome and time consuming to use. It took two hours to assemble, and a second person had to feed individual stainless steel staples into it with tweezers in order for a surgeon to use it.

Looking at the stapler, Hirsch had the inspiration that a disposable cartridge of staples would simplify the instrument’s use enormously. In the basement of his house, he made a prototype cartridge stapler out of balsa wood, and then spent $75,000 of his savings to have a metal version of his model made. Two surgeons at Johns Hopkins medical school in Baltimore tested the new device, and on the basis of their strong recommendation, Hirsch was able to line up $2 million in financing from two other investors to develop and market the product. In 1964 he incorporated the United States Surgical Company, with four employees.

From 1964 to 1967 Hirsch and his partners worked to refine their prototype and to develop a variety of other surgical instruments. They made this effort so that they would be able to spread the costs of their marketing activities among a number of different products. In 1967 USSC finally began to sell its products, distributing them through wholesalers of surgical supplies. The company’s main product, the surgical stapler that Hirsch had first developed, looked like a stainless steel wrench. It had a hooked end, and a slot for a staple cartridge. A surgeon placed the hooked end around the area to be closed, tightened the clamp, and then pulled a trigger to insert the staple. With this device, blood loss and injury to tissue was minimized, and time spent in surgery was sharply reduced. The device was used primarily for abdominal and thoracic surgery when it was first introduced.

In its first two years, USSC successfully sold staplers to a large number of surgeons. In 1967 sales totaled $350,000. By 1969, the company’s sales had reached $1 million. However, the company had also racked up $1 million worth of losses. Surgeons were buying the stapler, but they weren’t using it; USSC had counted on making its money from sales of the staple cartridges, which were disposable and had to be purchased again and again.

The company found that surgeons were instinctively cautious and conservative in the operating room, reverting in an operation to the techniques they knew best and had been trained to use. Only those surgeons who had been personally trained in the operating room by one of Hirsch’s employees had made the switch to regular staple use. USSC tried a number of different solutions to the problem of how to combine sales with training. First, 20 registered nurses were hired to act as technical instructors, training surgeons in the use of staplers in the operating room. This method worked, but it proved too expensive to be practical.

Then, Hirsch hired medics and paramedics leaving the army, and asked them to sell the stapler and to train surgeons. Although they had a sound medical background, Hirsch found that they were poor salesmen. Finally, in 1972 USSC hit upon the solution of hiring experienced salespeople, and then giving them medical training. The company developed a 240-hour course that covered many aspects of basic medicine, which was supplemented by 40 hours of training in an animal laboratory, where actual surgery was done. Overall, the training of each salesperson cost $8,000. To motivate its sales force, the company paid no regular salaries to salespeople, but only commissions, and dismissed employees quickly if they failed to perform well.

By the late 1970s, these efforts, as well as a high pressure corporate culture, had driven USSC’s sales to new heights, allowing the company to grow rapidly. From a base line of 20,000 patients who had operations with staples in 1969, the company’s market had grown to include 700,000 patients. In addition, the company had expanded its operations to Europe, training sales representatives to begin introducing surgical staples in that market.

At this time, however, clouds began to appear on the horizon. As USSC had contracted out its manufacturing when demand for its product grew, the company’s standards of quality control had slipped. To ameliorate this problem, USSC began to build new factories for its products in Puerto Rico and North Haven, Connecticut.

For many years, USSC had had the surgical staple market largely to itself. In 1977, however, one of its main competitors, Johnson & Johnson’s Ethicon division, entered the surgical staple market with a disposable stapler, which eliminated the need for the costly cleaning and maintenance of the re-usable stapler. The Ethicon stapler immediately became popular, and temporarily captured a large portion of USSC’s external wound closure market.

To counter this threat, USSC launched a four-year, $100-million development program to make up lost ground. The company announced that it would market its own disposable stapler, and that it would also move into new areas of medical supplies, like intravenous feeding sets and electronic vital signs monitors. These new products would have their own sales force.

Also in 1977 USSC decided to replace its network of independent distributors with its own operations. In response, one of its unemployed distributors moved to Australia and set up a competitor to USSC called Hospital Products, Inc., which began to market very similar products in the United States and Australia. USSC responded by suing Hospital Products, Inc., for a variety of infractions, including patent violations and misrepresentation. Hospital Products responded with legal action of its own, charging unfair competition and anti-trust violations, and the cluster of suits provoked a frenzy of backbiting and name-calling that went on as the legal actions dragged on into the mid-1980s.

Despite its rapid growth throughout the 1970s, USSC allegedly began in 1979 to engage in a series of illegal practices that were designed to inflate its sales figures. As the Securities and Exchange Commission (S.E.C.) later claimed, the company used fraudulent accounting practices and shipped faked or nonexistent orders in order to pump up its sales figures. In 1981, for instance, USSC claimed profits of $12.9 million, when in fact the S.E.C. calculated that it had earned only $200,000. In February, 1984, under pressure from the Securities and Exchange Commission, USSC agreed to cut its earnings claims by a total of $26 million for the years 1979 to 1982, and some of its managers agreed to give back bonuses they had earned in earlier years for fraudulently computed sales gains.

In addition, USSC was charged with a variety of illicit sales practices, all of which pointed to an atmosphere of extreme pressure within the company to sell. Salespeople complained that they were forced or encouraged to dump USSC products on hospitals and to engage in a number of dishonest practices, such as hiding products, stealing them, wasting them, writing phony orders, adding zeros to numbers on order forms, and sending products that hadn’t been ordered and then refusing to take them back. In 1980, in response to complaints from hospitals about overshipment, USSC revamped its sales management and fired 20 employees. In 1983 the company also moved to reduce pressure on its sales force by changing the structure of its payment from 100 percent commission on increase in sales, to half salary.

Despite these difficulties, by 1982 USSC’s sales had risen to $160 million. Although the company’s growth slowed in the following year, as cost-conscious hospitals cut back on inventory, the company’s sales nonetheless rose to $180 million. By 1984, USSC controlled 90 percent of the market for internal surgical staples and the majority of the market for external, skin staples.

USSC had diversified its product line to include 13 more products in 1981, and in 1984 it introduced a new technological breakthrough: absorbable staples, which made staple removal unnecessary. While absorbable suture thread had existed for years, the company’s new product introduced this quality to the stapling procedure. In the mid-1980s USSC also embarked on a program to enter the suture market. In 1987 the company won a ruling from the Food & Drug Administration streamlining the process for approval of new suture materials, and it announced plans to introduce its suture materials by the early 1990s.

By far the most important development of 1987 for USSC, however, was the introduction of the Surgiport trocar, a disposable tube-like device through which other surgical instruments were inserted into the body. The company had purchased exclusive rights to this technology from a company called EndoTherapeutics in the previous year. This gadget eventually opened the door to laparoscopic surgery, in which very small incisions were made in the body so that a camera could be inserted, enabling a surgeon to operate using instruments channeled through narrow tubes. This technique reduced the need for large incisions, which required long periods of recovery for the patient.

In the late 1980s USSC came under fire from animal rights activists for its use of dogs as laboratory animals. For years, the company had used hundreds of dogs to train its sales force in surgical techniques, and also to train doctors in the use of its instruments. Activists complained that these practices were unnecessary and constituted cruelty to animals, and the company was plagued by a number of vociferous protest demonstrations. In 1988 a bomb was placed neared Hirsch’s parking place by an animal rights protestor, but USSC’s company security had infiltrated the movement and was able to prevent the bomb from doing any harm.

Contrary to the wishes of the animal rights protestors, USSC’s financial fortunes skyrocketed in the early 1990s. Although the company sold only $10 million worth of laparoscopic tools in 1987, three years later the company introduced the “Endo Clip,” which allowed laparoscopic gall bladder removal, and the market for these tools began to grow rapidly. Soon, laparos-copy was also being used for hernia operations, appendectomies, hysterectomies, and other types of abdominal surgery.

With a virtual monopoly on sales of the equipment for these operations, USSC saw its sales grow by 50 percent in 1990 and 75 percent in the first half of 1991. Earnings during that time grew by 78 percent, and by the end of the year, they had nearly doubled since 1990. USSC sold more than $300 million worth of laparoscopic equipment in 1991, to become one of the fastest-growing companies in America, with profits of $91 million. The company’s stock price kept pace with its spectacular increase in business, and many of USSCs executives who owned stock found themselves millionaires.

Hirsch predicted ample room for growth in the laparoscopic field, as the technique was adapted to an ever greater number of surgical tasks, and USSC set out to market a package of laparoscopic tools, surgical staples, and sutures. In addition, the company began a major push to market its products in Europe, building a new sales and distribution center in France. Overall, one quarter of USSC’s revenues came from foreign sales.

By 1992, 85 percent of all gall bladder procedures in the United States were performed using laparoscopic techniques. At the end of that year, USSC’s revenues had topped a $1 billion, of which half was contributed by laparoscopic products. The company’s stupendous success with these instruments had attracted a competitor: industry giant Johnson & Johnson formed Ethicon Endo-Surgery and vowed to introduce 40 competing products. In response to this threat, and the presence of other competitors in the field, USSC brought suit alleging patent infringement.

In January, 1993, USSC won a suit against a subsidiary of Eli Lilly & Company in which its opponent was ordered to stop making and marketing its products. By the middle of the year, however, the company’s luck had changed, as its sales dropped dramatically in the face of price competition from its other competitor, Ethicon. In July, 1993, USSC reported a quarterly loss of $22 million. A switch in distribution practices, to a more prompt just-in-time delivery system, caused an unexpectedly sharp fall-off in sales, as hospitals used up the back-log of products that had stockpiled on their shelves, confident that they could acquire more when they needed them.

By September, 1993, USSC was still struggling with the effects of a vast oversupply of its products, and its stock price had gone into a steep slide. Anxiety over the possible effects of health care reform, as well as the maturation of the market for gall bladder instruments and a drop-off in popularity of other laparoscopic procedures, also helped to depress USSC’s sales. The company’s heavy investments in manufacturing capacity, which had caused it to go into debt, further damaged USSC’s financial results, and the company embarked upon a plan to reduce expenditures.

In October, 1993, USSC announced another quarter of losses and specified the cost-cutting procedures it would adopt. The company planned to lay off eight percent of its work force (700 people), cut executive pay, and reduce its stock dividend. In an effort to reduce the oversupply of its products, USSC announced that it would shut down its factories for two weeks in the fall and then re-open them on a four-day work week. In December, 1993, the company announced further cuts as its financial woes continued, and it took a $130 million charge against its earnings to pay for its restructuring.

In February, 1994, USSC began to seek investors to infuse badly needed cash into the company. This move came after USSC lost a suit it had brought against Ethicon for patent infringement, removing the possibility of a big cash settlement to strengthen its balance sheet. With uncertainty about the future of the health care industry continuing into the mid-1990s, USSC’s ultimate fate also appeared to be up in the air.

Further Reading:

Driscoll, Lisa, “U.S. Surgical Has Hearts Beating Faster,” Business Week, August 12, 1991.

Feder, Barnaby J., “Feuding by Hospital Suppliers,” New York Times, August 25, 1981.

Kleinfeld, N. R., “U.S. Surgical’s Checkered History,” New York Times, May 11, 1984.

Smart, Tim, “Will U.S. Surgical’s Cutting Edge Be Enough,” Business Week, September 21, 1992.

Smith, Geoffrey, “The guts to say ’I was wrong,’ “Forbes, May 28, 1979.

Teitelman, Robert, “Case Study,” Forbes, May 7, 1984.

—Elizabeth Rourke